Will the Economic Stimulus Be Too Compromised to Work?


This week, House Democrats unveiled their vision for an economic recovery package of massive heft -- a bill totaling more than four times the cash spent during FDR's New Deal.

According to the Washington Post, the recovery package, totaling around $825 billion, contains $550 billion in domestic spending -- infrastructure investments, help for those getting pummeled in the downturn and aid to cash-strapped state and local governments -- and about $275 billion in tax cuts for businesses and individuals. The proposal circulating on the Hill calls for:

  • A $500 payroll tax credit for workers making below $75,000. Couples making below $150,000 would receive a $1,000 credit.
  • About $85 billion worth of infrastructure spending, most for highway and bridge construction.
  • A variety of tax incentives to promote development of renewable energy sources. Expanded assistance to workers who are laid off because their jobs are shifted overseas as the result of trade agreements.
  • Unemployment benefits increased by $25 per week, and federal welfare funding for the poor also temporarily increased.
  • Low-income elderly and disabled Social Security recipients would receive a one-time additional monthly payment.
  • $80 billion in funding to states for education programs and about $90 billion for Medicaid assistance.
  • The package also contains "temporary subsidies to workers who have lost their jobs, and would extend the availability of COBRA [health] coverage through former employers, beyond the current 18-month period. Addressing another Obama campaign priority, the bill would launch a new health information technology initiative aimed at establishing nationwide standards, payments incentives and privacy protections for medical records."

Congressional Democrats are also considering including a middle-class tax measure that might add $75 billion to the total value of the bill.

Now the legislative wrangling begins, and Obama's transition team is reportedly hoping to pass the final product with at least 70 votes in the Senate. That means it's going to be the first test of the sunny "post-partisanship" Obama promised Americans on the campaign trail. The $64 question -- or maybe the $825 billion question -- is whether Obama will compromise with Republicans and conservative Democrats to an extent that makes the enormous economic investment fall flat; whether in the name of bringing civility (a mythical civility that never existed) to Washington, hundreds of billions of our tax dollars are dedicated to measures that line the pockets of various constituencies, but ultimately provide little bang for the buck in terms of kick-starting the economy.

Also to be determined on The Hill in the coming weeks is whether, and to what degree, the final stimulus package will represent a real break from Washington's often shortsighted status quo -- with longer-term projects designed to wean America off its 1950s-era, fossil-fuel-driven commuter lifestyle. In the short-term, infrastructure projects may be the way to create new jobs, but simply rebuilding the highways and bridges that enable us to maintain an ultimately unsustainable lifestyle isn't going to bring the United States into the 21st century.

Compromise or Bang for the Buck?

The budgetary debates in Washington have become dully formulaic. The Republicans -- joined by pro-business "Blue Dog" Dems -- want to cut taxes, and although they cage it in rhetoric touting the wonders of entrepreneurial endeavor, the bottom line, as always, is that they want to skew those cuts toward the wealthy.

Both the right-wing Heritage Foundation and the Club for Growth, a corporatist political action committee, have their own proposals for a recovery package. Both have the same prescriptions -- and embody the same ideological assumptions -- as conservative lawmakers in Congress: extend Bush's "temporary" tax cuts into forever, and then cut taxes on corporations and wealthy investors, yet again.

In the House, the Republican Study Committee -- the dead-enders of the conservative movement -- released its plan, which gives a nod to the middle class by increasing the child tax credit, but is otherwise more of the same: tax cuts and a 1 percent decrease in discretionary spending, just when there is something approaching a consensus among economists -- from across the ideological spectrum -- that the government must spend money in an attempt to make up for the fact that people are not.

More enlightened pols generally want to beef up social programs targeted at vulnerable segments of the population, and that's especially true at this moment in time.

In recent history, bipartisanship has generally resulted in a "compromise" that entails the conservatives getting some but not all of their cuts for those at the top of the heap and progressives getting some but not all of their wish list. Math, being for the most part non-ideological, dictates that the result is borrow-and-spend, with deficits mounting, and the resources needed to service that debt taking an ever-greater chunk of the government's revenues.

That dance of poor governance is frustrating in normal circumstances, but with the economy still teetering on the brink of disaster, too much "post-partisan" dealmaking can result in a whole lot more pain in the real world than might otherwise be the case. 

That's because when it comes to stimulating the economy, the facts have a distinctly liberal bias. Corporate tax cuts, cuts on investment gains and other gifts to the wealthy do next to nothing to kick-start the economy, while aid to the unemployed, help for cash-strapped governments and other progressive measures have the potential to make a significant impact.

According to an analysis by economist Mark Zandi of Moody's (who happens to be a conservative Republican), each dollar spent on corporate tax breaks results in an economic boost of 30 cents; a dollar for reducing capital gains taxes results in 37 cents worth of stimulus, and each dollar in lost revenues from making Bush's tax cuts permanent gives the economy a miniscule 29-cent lift.

Meanwhile, a dollar spent on infrastructure gives the economy a boost of $1.59; a dollar in aid to cash-strapped states gets $1.36 back in economic activity, and each buck spent on food stamps provides $1.73 worth of stimulus.

Economist Dean Baker at the Center for Economic and Policy Research looked not only at the various approaches' impact in terms of dollars, but also on employment. He estimated that $100 billion spent on infrastructure investments would yield about a million net new jobs, while that same amount spent on corporate tax breaks would yield 200,000 jobs -- one-fifth of the bang for the same buck.

Obama has hoped for broad bipartisan support for the package, but the question is how much cash he will throw toward corporate America to get it. The transition team was reportedly considering structuring as much as 40 percent of the recovery package as tax cuts (although some of those cuts were targeted lower down the economic food chain).

There's some room for optimism on this front. According to The Hill, "Obama told Democrats behind closed doors that he would listen to their suggestions to reduce the number of tax cuts in the package and spend more on infrastructure projects and renewable energy development" than he'd previously planned. On Monday, his transition team leaked that it was dropping a corporate tax credit for creating new jobs that was widely criticized as a pointless giveaway. About a third of the value of the Democratic proposal released this week are structured as tax cuts -- a smaller chunk than what Obama's team had floated earlier.

Obama is coming into office at a time of deep crisis and with a pocketful of political capital. His administration needs to get this measure -- one that will likely define his presidency -- right. There won't be a second chance down the road; the political moment will end with the new president's honeymoon period.

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